On 15 September 2017, the Hon'ble Supreme Court of India
(Supreme Court) delivered a judgment in the matter of State of
Uttarakhand v Kumaon Stone Crusher[1] deciding the issue of levy of
transit fee on forest produce arising out of the States of Uttar
Pradesh, Uttarakhand and Madhya Pradesh. The State Governments
levied transit fees on forest produce under the Indian Forests Act,
1927 (1927 Act) which was challenged by the assessees in the
respective three High Courts which delivered different verdicts.
The Supreme Court, however, held the levying of fee on transit of
forest produce by the State Governments to be constitutionally
valid.

The broad issues to be decided by the Supreme Court were as
follows:

In view of the Mines and Minerals (Development &
Regulation) Act, 1957 (MMDR Act, 1957) enacted by the Parliament,
whether the State Government has the power to regulate and levy
fees on transit of coal and other minerals under the 1927 Act?

Whether the MMDR Act, 1957 impliedly repealed the 1927 Act as
per Article 372 of the Constitution of India (Constitution)?

Whether 'coal' is covered within the definition of
'forest produce' under the 1927 Act?

Whether the words 'brought from' used in section
2(4)(b) of the 1927 Act would cover such items which though did not
have origin in the forest but are transported through a
forest?

Whether Transit Fee on forest produce (a regulatory charge
provided for under Section 41 of the 1927 Act) (Transit Fee) can
still be charged when the forest produce has undergone a
manufacturing process to become a commercial commodity?

Whether there is a broad correlation between increase in
transit fee and expenses incurred in regulation of forest produce,
although the State is not liable to prove any quid pro
quo?

Whether the State has satisfactorily justified the increase in
Transit Fee by the 4th & 5th amendment to the Uttar Pradesh
Transit of Timber and other Forest Produce Rules, 1978 (1978 Rules
) by producing relevant material?

Whether by adoption of ad valorem basis by the 5th amendment to
the 1978 Rules, the Transit Fee no longer remains a fee and has
changed into the character of a tax?

Arguments on behalf of the Assessees

The broad arguments on behalf of the assessees to answer the
above questions were:

The regulation of coal is outside the 1927 Act and is regulated
by the MMDR Act, 1957 and Coal Bearing Areas (Acquisition &
Development) Act, 1957.

The 1957 Act was enacted by the Parliament under Entry 54 of
List I of VII Schedule of the Constitution which relates to
regulation of mines and the development of minerals. The
legislative competency of the State regarding mines and minerals
development is contained in Entry 23 of List II which is subject to
provisions of List I. In so far as transit fee on minerals is
concerned, the entire field is covered by the 1957 Act and the
State is denuded of any jurisdiction to legislate.

The 1957 Act is a special enactment which shall override the
1927 Act which is a general enactment.

The provisions of the 1978 Rules under which the State of UP
levied the transit fee along with Section 41 of the 1927 Act, are
repugnant to the provisions of the 1957 Act and stand overridden in
terms of Article 372 of the Constitution.

The transit and transportation of minerals is an integral part
of regulation and development of minerals and the law enacted by
the Parliament is to occupy the entire field regarding the transit
and transportation of minerals and development of mines. No other
law can overreach upon the occupied field.

The assessees of MP argued that they did not mine coal but
purchased it from Northern Coal Fields Ltd. or from other coal
fields. The royalty and other charges on the coal purchased from
different coal fields was also paid by the assessees in terms of
the provisions of the 1957 Act.

Coal cannot be brought within the definition of 'forest
produce' under the 1927 Act since it is obtained from
collieries which are not situated in forests.

The word 'forest' as used in 1927 Act as well as in the
1978 Rules must be read as 'forest' as enumerated in the
1927 Act, i.e., a reserved forest, a village forest and a protected
forest. Transit Fee can be charged only when forest produce
transits through a reserved forest, a village forest or a protected
forest.

Since the Third Amendment Rules were substituted by the Fourth
& Fifth Amendment Rules and the Fourth & Fifth Amendment
Rules were struck down by the Allahabad High Court on 11 November
2011[2], the Third Amendment Rules
shall not revive and the State of UP cannot charge fee on that
basis.

The transit fee levied by the State of UP is excessive in
nature and the State has not produced data for justifying the
increase in the transit fee. Further, exorbitant increase by way of
the Fourth and the Fifth Amendments has robbed the regulatory
character of the Transit Fee which has now become confiscatory and
has partaken character of tax.

It is true that quid pro quo is not to be proved for
regulatory fee but the State was obliged to prove a broad
correlation between the levy of Transit Fee and the expenditure
incurred by the State on the transit of forest produce.

The State has not provided any details of the expenditure which
it has incurred in regulation of transit of the forest produce but
has given figures of expenditure of the entire forest department
which could have no correlation with the collection of Transit Fee.
The entire expenditure of the forest department could not be met by
collection of Transit Fee.

Fixation of fee on Transit Pass qua tonnage is a colourable
piece of exercise of power

The words 'brought from forest', means that the forest
produce originated from the forest. This implies that for any
produce to be 'forest-produce' under Section 2(iv)(b) of
the 1927 Act, the forest has to be the starting point of transit
and not in transit. The Division Bench of the Allahabad High Court
in its judgment dated 27 April 2005 in Kumar Stone Works &
Others v State of UP & Others [3] erred in equating the words
'brought from forest' as 'brought through
forest'.

In Section 2(4)(b) of the 1927 Act the words 'found in'
and 'brought from' are qualified by word 'when',
which denotes the time factor. The word 'when' signifies
that the item while leaving the forest is in continuous process of
transit from the point where it is said to be found in. But once,
the continuous transit of forest produce terminates at any point of
place which is not a forest item included in Clause B(4)(2), it
shall cease to be 'forest produce' and further transit of
such material being material not brought from forest shall not
attract tax under Section 41 of the 1927 Act.

Arguments on behalf of the State

It was argued that the subject matter and objects of the 1927
Act and the 1957 Act are distinct and different. The provisions of
the 1927 Act relating to transport of forest produce are only
incidental and ancillary in nature. Further, the 1957 Act does not
impliedly overrule the 1927 Act, both the legislations being under
different subjects. The machinery for enforcement, the officers and
consequences of breach are different for the 1927 Act and the 1957
Act and the provisions of both the Acts operate in different
fields.

The provisions of the 1927 Act in so far as Section 41 and
Rules of 1978 are concerned, shall not stand impliedly overruled by
Parliamentary enactment of the 1957 Act in terms of Article 372 of
the Constitution. In the 1927 Act, the provision relating to
transport of forest produce is only incidental and ancillary in
nature. The 1927 Act comprehensively deals with forest and forest
wealth whereas the 1957 Act deals with mines and minerals
wealth.

The word 'forest' has to be understood broadly. The
definition of forest as given by the Supreme Court in TN Godavarman
Thirumulkpad v Union of India and others[4] , is to be followed. The High
Court has rightly understood 'forest' to be a large track
of land covered with trees and undergrowth usually of considerable
extent, on the principles of sound ecological and scientific basis
reflecting sociological concerns.

Transit Fee is regulatory in nature and for regulatory fee,
quid pro quo is not necessary.

The increase in Transit Fee vide the Fourth and Fifth
Amendments to the Rules was justified. The method chosen by the
State Government to levy the fee based on quantity of minerals
would not change the nature and character of the levy.

The State of MP argued that the fee for issuance of transit
passes has been charged under Notification dated 28 May 2001 issued
in exercise of power under Rule 5 of the Rules of 2000. The Rules
were framed under Section 41 of the 1927 Act and there is no
encroachment on the provisions of the 1957 Act. The power of
regulation and control under 1957 Act is totally different from the
imposition of fee on Forest Produce by the State. Further, the
regulatory fee is not charged on extraction of minerals but only on
the transportation of minerals.

Judgment of the Supreme Court

The Supreme Court decided the issues in the following
manner-

Coal is a 'forest produce' under Section 2 of the 1927
Act since it is formed from plant substances preserved from
complete decay in a normal environment and later altered by various
chemical and physical agencies. The formation of coal itself is due
to large tracts of forest getting buried under the ground due to
natural processes.

The 1957 Act does not impliedly repeal the 1927 Act in so far
as Section 41 and Rules of 1978 are concerned.

A pre-constitutional statute which has been continued in force
by virtue of Article 372 of the Constitution is to continue until
altered or repealed or amended by a competent legislature.
Initially, the subject 'forest' was in Entry 19 of List II
of the Constitution. Thus, it was the State legislature which was
competent to alter or repeal or amend the said law. Entry 19 was
omitted from List II and transferred to List III as Entry 17A with
the 44th Amendment to the Constitution which came into effect on 3
January 1977. Thus, with the 44th Amendment in force, both the
Parliament and the State legislature are competent legislatures
within the meaning of Article 372. In the instant case, under the
1927 Act, 'transit of forest produce' itself is the subject
of primary legislation as can be seen from the Preamble and the
provisions of Section 41 & 42 of the 1927 Act. In contrast, the
detailed provisions of the 1957 Act deal with regulation of mines
and development of minerals (Section 4 to 17 and Section 18) as
primary legislation. Provisions relating to transport or storage
are only incidental and ancillary in nature. The question of repeal
by implication arises when two statutes become inconsistent to the
extent that competence of one is not possible without disobedience
to other however, no such inverse relationship can be drawn in case
of the 1957 Act and the 1927 Act. Both the legislations being on
different subject matters, the provisions relating to
transportation of minerals as contained in 1957 Act can at best be
said to be incidentally affecting the 1927 Act. Further, incidental
encroachment of one legislation with another is not forbidden in
the constitutional scheme of distribution of legislative
powers.

Any produce moving within or from outside or outside the State
which has originated in a forest requires a transit pass for
transiting in the State of UP. Conversely, any goods which did not
originate in forest whether situated in the State of UP or outside
the State but is only passing through a forest area may not be
forest produce answering the description of forest produce within
the meaning of Section 2(iv)(b)

The term 'found in' in Section 2 (iv)(b) of the 1927
Act refers to things growing in a forest like timber trees, fuel
trees, fruits, flowers etc. or mineral deposits or stones existing
in the forest. The expression 'brought from' also alludes
to the source of the thing so brought being within the area of a
forest.

'Forest' shall include all statutorily recognised
forests, whether designated as reserve, protected or otherwise. The
term 'forest land', occurring in Section 2 of the 1927 Act,
will not only include 'forest' as understood in the
dictionary sense, but also any area recorded as forest in the
Government records irrespective of the ownership.

If the processing of forest produce does not result in bringing
out a new commodity but preserves the same and renders it fit for
markets, it does not change its character hence, it remains forest
produce.

The Third Amendment dated 9 September 2004 to the 1978 Rules
could have been resorted to for realising the Transit Fee even in
the wake of the Fourth and the Fifth Amendment having been declared
to be invalid by the High Court. In fact, the Supreme Court in the
interim order dated 29 October 2013 had expressly directed that the
State shall be free to recover Transit Fee for forest produce
removed from within the State of UP at the rate stipulated in the
Third Amendment to the 1978 Rules.

The High Court was justified in striking down the Fourth and
the Fifth Amendments to the 1978 Rules. The increase in transit fee
was excessive and the character of the fee changed from simple
regulatory fee to a fee which was for raising revenue. There was no
maximum cap in the Fifth Amendment to the 1978 Rules although a
minimum fee was prescribed.

With respect to the State of MP, the High Court had taken an
incorrect view of the matter by concluding that the Notification
dated 28 May 2001 is beyond the power of the State under Rule 5 of
the Rules of 2000. Rule 5 clearly empowers the State to fix the
rate of fee and when the State is empowered to fix the rate, it has
the latitude under the statute to adopt a basis for fixation of
rates.

Comment

The judgment delivered by the Supreme Court contains a detailed
analysis of the operation of pre-constitutional statutes after 1956
by virtue of Article 372 of the Constitution of India.

The judgment, although upholds the leviability of transit fee on
forest produce including minerals, however, the excessive increase
in regulatory fee has been stuck down.

Khaitan & Co represented one of the assessees in the matters
arising out of the State of Madhya Pradesh.

The content of this document do not necessarily reflect the
views/position of Khaitan & Co but remain solely those of the
author(s). For any further queries or follow up please contact
Khaitan & Co at legalalerts@khaitanco.com

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